Latest / The Money Puzzle / Private credit - the boom boils over

Transcript

Private credit - the boom boils over · The Money Puzzle

0:10
Speaker 1: Hello, and welcome to The Australian's Money Puzzle podcast. I'm
0:13
Speaker 1: James Kirby. Welcome aboard everybody. Now, we have been skeptical,
0:16
Speaker 1: very skeptical about the boom and private credit funds being
0:20
Speaker 1: pushed I think at every day investors for some time,
0:23
Speaker 1: and I think some of that question is beginning to
0:26
Speaker 1: be justified. There is issues here locally and there are
0:31
Speaker 1: bigger issues overseas. So these private credit funds are, guess what,
0:35
Speaker 1: getting into trouble. I want to talk about that today.
0:37
Speaker 1: I also want to talk about the different issue, but
0:39
Speaker 1: important issue, commissions in financial advice. I thought they were banned,
0:44
Speaker 1: So how come we're seeing so much headlines and comment
0:48
Speaker 1: about commissions in this first Guardian scandal And what are
0:50
Speaker 1: they actually commissioned? That's the thing. And oh, yes, funds
0:54
Speaker 1: are back, believe it or not. Even government bonds are back. Yes, boring,
0:58
Speaker 1: but hey more than four percent and already. So who
1:02
Speaker 1: could cover these diverse issues for us?
1:05
Speaker 2: Well?
1:05
Speaker 1: Doug Charek, Family Office advisor and Investment Committee director, friend
1:11
Speaker 1: of the show. We haven't talked for a while. How
1:14
Speaker 1: are you, Doug?
1:16
Speaker 2: James, I'm terrific and hello listeners.
1:19
Speaker 1: Great to have you on I mean family office, and
1:22
Speaker 1: that scene is very much a scene. Now you were
1:25
Speaker 1: full time engaged before that as an advisor for a
1:29
Speaker 1: lot of time Baron's Top hundred advisor. Just for the
1:33
Speaker 1: everyday listener. We're hearing all this stuff about commissions at
1:39
Speaker 1: First guard in that scandal, which is the worst scandal
1:42
Speaker 1: in financial advice. For some time, I thought commissions were gone,
1:45
Speaker 1: I mean are they gone.
1:47
Speaker 2: They mostly are gone. And in the case of First
1:51
Speaker 2: Guardian and Shield, they were bypassed. They were bypassed as
1:57
Speaker 2: through some payments for for flow I guess volume bonuses,
2:02
Speaker 2: whatever you want to call them. So the you know,
2:05
Speaker 2: commissions are gone in most cases, probably two important exceptions.
2:09
Speaker 2: One is in insurance commission insurance is are sold, not
2:13
Speaker 2: bought product and having handed over checks to widows, to
2:18
Speaker 2: the terminally ill and the ill in a former life.
2:23
Speaker 2: I don't worry too much about over selling insurance because
2:26
Speaker 2: we have an insurance crisis and no one wants to
2:28
Speaker 2: pay for insurance advice, so I don't worry about that
2:31
Speaker 2: and so much. And there are caps and there are disclosures,
2:35
Speaker 2: and there are rules now to have to pay insurance,
2:37
Speaker 2: and funny enough, my last body corporate property meeting. That
2:41
Speaker 2: turns out half of the fee of the body corporate
2:44
Speaker 2: agent is from an insurance commission. So anyway, let's set
2:49
Speaker 2: aside insurance commissions.
2:51
Speaker 1: Sorry it's yours. And mortgage brokers they're kind of outside
2:54
Speaker 1: the loop here.
2:55
Speaker 2: Yeah, I think. And mortgage brokers are still there. And
2:57
Speaker 2: another one which is probably problematic still and is undealt
3:02
Speaker 2: with is sophisticated wholesale investors. So your listeners should be
3:06
Speaker 2: very careful when they are signing up for a financial
3:10
Speaker 2: product that is being sold where they are treated as
3:13
Speaker 2: a sophisticated a wholesale investor because those retail protections do
3:17
Speaker 2: not apply, and the person promoting that stock offer might
3:21
Speaker 2: get one and a half percent of the IPO, they
3:24
Speaker 2: may get kickbacks and commissions. So yeah, that one, and
3:28
Speaker 2: there is some very there's some good questions about what
3:31
Speaker 2: is the test for a sophisticated investor and it seems
3:34
Speaker 2: to be dropped by government. But coming back to First
3:37
Speaker 2: Guardian and Shield, it's a tragedy. The core of the
3:40
Speaker 2: tragedy is poorly designed financial product that took too much risk,
3:46
Speaker 2: highly concentrated property development, and allegedly fraud if one of
3:50
Speaker 2: the operators indeed has a Lamborghini and a riverfront house
3:55
Speaker 2: because of this is not proper. But what made the
3:58
Speaker 2: problem worse was the high hyper marketing and the hyper
4:01
Speaker 2: marketing of that made this problem bigger when it eventually exploded.
4:06
Speaker 2: Is where your question comes from, which is, you know,
4:09
Speaker 2: how did the incentives work. It is illegal for a
4:12
Speaker 2: retail advisor to hawk or call someone for advice, but
4:15
Speaker 2: it's apparently not illegal for them to pay for leads,
4:19
Speaker 2: and there are a few lead generation firms out there.
4:23
Speaker 1: The lead generation. Yeah.
4:25
Speaker 2: Well, it's a complicated scandal and we could talk about
4:27
Speaker 2: so many aspects of it, Like at the moment, the
4:30
Speaker 2: regulator is going after the superannuation trustees and saying you
4:33
Speaker 2: should have done a better job as the market, as
4:35
Speaker 2: the supermarket operator to know what was on your shelves,
4:38
Speaker 2: and they're like, well, I thought I was just running
4:41
Speaker 2: a supermarket and the personal shoppers were responsible. And then
4:44
Speaker 2: of course you know the people who rated the products,
4:47
Speaker 2: that's pretty clear. I think that they didn't do a
4:50
Speaker 2: good job, didn't do their due diligence. But there's a
4:52
Speaker 2: whole bunch of finger pointing going on. It's alleged the
4:55
Speaker 2: regulator was told about this for many years. Didn't that
4:58
Speaker 2: quick enough? I don't know, you're the investigator journalist, James,
5:01
Speaker 2: and I'm only reading the second hand.
5:02
Speaker 1: But and it should be said that Macquarie and Laser
5:07
Speaker 1: Self Wealth have actually come to the table and paid
5:10
Speaker 1: outfold give.
5:11
Speaker 2: Contributed some money. That's right, there's the hat is going around.
5:14
Speaker 2: And then there's a big problem that we have the
5:17
Speaker 2: financial scheme of Last Resort, which is going to run
5:21
Speaker 2: out of money if it has to keep funding these things.
5:24
Speaker 2: And the funding base of that is a narrow set
5:26
Speaker 2: of advisors, not institutions, not product providers. So then the
5:30
Speaker 2: government is now you probably have told listeners going to
5:32
Speaker 2: put a tax on self managed super funds who aren't
5:35
Speaker 2: even eligible to participate in this scheme, but they have
5:38
Speaker 2: to contribute. So yeah, we're back to a mess. It's
5:42
Speaker 2: a shame because again you know even that when Assek
5:45
Speaker 2: published the list of lead generations and firms using it,
5:49
Speaker 2: you know it's ten firms amongst a thousand or five hundred,
5:54
Speaker 2: So it's another case of bad apples.
5:57
Speaker 1: So just to terrify folks, if you followed that issue
6:00
Speaker 1: with first garagon as Doug says, the law is the law.
6:03
Speaker 1: There is no commissions anymore financial advice. There are commissions
6:07
Speaker 1: for insurance, there are commissions for mortgage broken and in
6:10
Speaker 1: the case of First Garagon, if you look at it closely,
6:12
Speaker 1: in terms of the regulatory and legal actions so far,
6:15
Speaker 1: the word commissions isn't used. There is a spectacular array
6:19
Speaker 1: of fees, highly controversial fees, and alleged fraud in that area.
6:24
Speaker 1: We will see that play out. But for what it's worth,
6:27
Speaker 1: all that talk about commissions in the press is actually
6:30
Speaker 1: they're using the wrong word. Commissions are banned. If that
6:33
Speaker 1: makes you feel any better, I don't know if it does, Doug,
6:35
Speaker 1: I want to talk to you about a couple of
6:37
Speaker 1: things that you want to talk about.
6:39
Speaker 2: Oh well, just before The only other thing I could
6:41
Speaker 2: suggest as a consumer protection is, you know, it does
6:44
Speaker 2: look like if you were working with an independent firm
6:47
Speaker 2: who receives no types of these payments and aren't allowed
6:51
Speaker 2: to receive any commissions, you might have been better protected.
6:54
Speaker 2: So that's another suggestion for listeners is be careful being
6:59
Speaker 2: considered a sophisticated wholesale investor in opting out of these
7:03
Speaker 2: retail protections and other and if you are searching for advice,
7:05
Speaker 2: and I do believe in the value advice, I would
7:08
Speaker 2: favor looking for an independent firm of which you know
7:11
Speaker 2: there are five ten percent of the operators out there
7:13
Speaker 2: would meet. That's harder than past definition.
7:17
Speaker 1: And don't be flattered. Don't be flattered by the fact
7:19
Speaker 1: that you're you qualify as a sophisticated investor, especially if
7:22
Speaker 1: somebody seems to be more enthusiastic than you are. All right,
7:25
Speaker 1: we'll take a short break back in a moment. Hello,
7:35
Speaker 1: Welcome back to the Australians Money Puzzle podcast. James Krby
7:38
Speaker 1: here with Dr Doug Turek, a regular on the show.
7:42
Speaker 1: You have heard him many times over the years on
7:44
Speaker 1: many subjects, A very experienced advisor and now in the
7:47
Speaker 1: family office advisory world, which is another league altogether. So
7:52
Speaker 1: tell us in that world, Doug. Private credit. All of
7:56
Speaker 1: a sudden, we have been warning on the show. Maybe
7:58
Speaker 1: we were too conservative on the show, telling people not
8:03
Speaker 1: to go near it in many cases, but really I've
8:07
Speaker 1: always been skeptical that the everyday investor listening to the
8:11
Speaker 1: show is a suitable candidate for private credit. Most of it,
8:15
Speaker 1: most people, most of the time suddenly suddenly there are
8:19
Speaker 1: some funds well. Blew Out of course, is in the
8:21
Speaker 1: terrible spot, very big operator in the US, and it's
8:25
Speaker 1: share price been sort off really heavily. So what's going
8:30
Speaker 1: on and what's your view now about private credit? I
8:35
Speaker 1: don't mean for family officers, I'm sure they know what
8:37
Speaker 1: they're doing, but for the everyday investor.
8:40
Speaker 2: Well, I think James, your right to caution investors that
8:44
Speaker 2: when you're bundling your money with others and lending it
8:48
Speaker 2: out in a way where you surrender access to your monies,
8:53
Speaker 2: be careful they may not be always available to you.
8:56
Speaker 2: And austrain investors probably know a little bit more about
8:59
Speaker 2: this than American investors. I do remember through the GFC,
9:04
Speaker 2: Australian investors were taught a very hard lesson around unlisted
9:08
Speaker 2: property trusts freezing and mortgage trusts freezing. And some of
9:13
Speaker 2: these funds did fine eventually, But when all the when
9:17
Speaker 2: there is a run in redemptions on a pool of
9:20
Speaker 2: investments that are not on liquid the money, these funds
9:24
Speaker 2: have to freeze to protect themselves. Now, a basket of
9:28
Speaker 2: private credit loans, you know, probably will come back to
9:31
Speaker 2: the lender in a year or two. So it's probably
9:34
Speaker 2: more liquid than a basket of property or a basket
9:38
Speaker 2: of private equity, which has even bigger liquidity problems. But
9:41
Speaker 2: liquidity is this funny thing. For ninety percent of the time,
9:44
Speaker 2: no one worries about it and thinks that they can
9:46
Speaker 2: get their money back out at the end of the
9:48
Speaker 2: month or with thirty days notice or whatever one of
9:51
Speaker 2: these unlisted fund rules are. But as soon as there's
9:53
Speaker 2: a rush to the exits, there's not liquid assets to sell,
9:57
Speaker 2: and the operator is probably doing the right thing by
9:59
Speaker 2: the ulka the investors, and that's not it's just freezing
10:03
Speaker 2: the exit and gating and letting people out slowly. But
10:06
Speaker 2: it's a little bit like a run on a bank.
10:08
Speaker 2: One investor runs if you see a queue at the bank,
10:12
Speaker 2: then everyone panics and the bank will just freeze, And
10:14
Speaker 2: that's kind of what's happening. You mentioned Blue Owl, which
10:17
Speaker 2: is a very large and capable private lender in America,
10:21
Speaker 2: and they have a number of unlisted funds, and coincidentally,
10:26
Speaker 2: they have almost the identical fund listed on the stock market,
10:29
Speaker 2: and the fund listed on the stock market is trading
10:32
Speaker 2: at a discount of about thirty percent to the asset value.
10:37
Speaker 2: And those funds, by the way, are so confident they're
10:40
Speaker 2: geared about two x. So what they're kind what the investor,
10:43
Speaker 2: what the share market is saying is we think that
10:47
Speaker 2: the loans out there are only eighty five cents good
10:50
Speaker 2: on the dollar, you know, doubled up for gearing. So
10:53
Speaker 2: that's maybe the market doing its job. And you can
10:55
Speaker 2: invest in the Blue Owl Fund. OBDC is one of
10:58
Speaker 2: the largest of these funds, and it's giving you supposedly
11:02
Speaker 2: a yield of thirteen percent, but that's before they might
11:05
Speaker 2: slow redemptions or anyway. But the unlisted version of that
11:10
Speaker 2: fund is being sold at par and the investors in
11:13
Speaker 2: those funds think they for every dollar they have invested,
11:16
Speaker 2: it's worth a dollar. And then they look over the
11:18
Speaker 2: shoulder at the share market and they go, well, a
11:21
Speaker 2: dollar of these same assets is only trading at seventy
11:23
Speaker 2: cents in the dollar. So something's not right here. So
11:27
Speaker 2: now no surprise, a lot of investors are running for
11:29
Speaker 2: the exits and they've had to freeze the fund.
11:32
Speaker 1: The fund and the thing is Doug the regulator here
11:35
Speaker 1: ACIK just a few months ago came out and you
11:37
Speaker 1: know the big names Metrics, credit partners La Trube, the Acid.
11:41
Speaker 1: You put out a warning effectively quite a strong warning
11:44
Speaker 1: before Christmas that they were unhappy with many aspects of
11:47
Speaker 1: these funds, particularly their transparency. And that's from a that's
11:52
Speaker 1: from a regulatory, pretty sophisticated view. But for everyday investors,
11:57
Speaker 1: I think the issue is tell me if I'm wrong.
12:00
Speaker 1: When you go to one of these funds, they say, so,
12:03
Speaker 1: this is not like the share market. Okay, this is unlisted,
12:05
Speaker 1: but you can get your money out and they might
12:07
Speaker 1: say quarterly. You know, they might say monthly. But there's
12:10
Speaker 1: fine print, isn't there, And that ability to get your
12:14
Speaker 1: money out quarterly is really it's discretionary.
12:18
Speaker 2: It only works if there's only far less than ten
12:22
Speaker 2: percent of the assets that won out at that day.
12:25
Speaker 2: So again, if there's a kind of run on the
12:26
Speaker 2: fund like a run on the bank, that the just
12:29
Speaker 2: is not enough liquidity. And ninety percent of the time
12:32
Speaker 2: this is not an issue. Now ask did an excellent job,
12:35
Speaker 2: and then all the listeners can go on and read
12:37
Speaker 2: that report. It's well written. It has about half a
12:39
Speaker 2: dozen concerns. It has some concerns around fee transparency and
12:43
Speaker 2: inter party details, and it just shows that you know,
12:46
Speaker 2: these things aren't as safe as term deposits, and yet
12:49
Speaker 2: they some of them are being marketed like that. And
12:52
Speaker 2: you know, we could probably link this into APRA's decision
12:56
Speaker 2: to stop retail investors investing in hybrid securities. And you know,
13:00
Speaker 2: the first thing to remember is there are securities out
13:03
Speaker 2: there available on the market that will last as long
13:06
Speaker 2: as twenty thirty two. So I'm personally a fan, and
13:09
Speaker 2: I think you might as well just stay there and wait.
13:11
Speaker 2: But some people are suggesting some of these listed private
13:15
Speaker 2: credit funds or unlisted private credit funds are an alternative.
13:19
Speaker 2: There's an all smorgas board of things in the bond market
13:22
Speaker 2: that could be used in place of hydri Do.
13:24
Speaker 1: You think they're an alternative?
13:26
Speaker 2: They're all different, they are all I have different risk
13:29
Speaker 2: reward features.
13:30
Speaker 1: Well, if I said to you that bank hybrid to
13:34
Speaker 1: me was a instrument half equity half bond, and guess
13:40
Speaker 1: what it was linked with government guaranteed banks in Australia,
13:43
Speaker 1: and I thought that was good enough for me before
13:46
Speaker 1: I saw any of the ratings or the grades. And
13:49
Speaker 1: if I was comparing that to unlisted credit funds, I
13:52
Speaker 1: would call that shooting in the dark. So what I
13:56
Speaker 1: mean is that they're enough remote comparable.
13:58
Speaker 2: That's right. So the concern is, you know, we're getting
14:01
Speaker 2: read rid of a semi risky product, and people will
14:04
Speaker 2: find a way into riskier products. And I do believe,
14:08
Speaker 2: given your comment, which I agree with, that they were
14:11
Speaker 2: sort of indirectly backstopped by the federal Commonwealth government. They
14:14
Speaker 2: paid above average return for below average risk. Now I
14:18
Speaker 2: think the government is I can see it. If you're
14:20
Speaker 2: sitting in Canberra, you might say, I don't like franking.
14:23
Speaker 2: I don't like how the banks are using franking credits
14:25
Speaker 2: here too, and I'm paying for some of this hybrid return.
14:28
Speaker 2: And I think they could say, I don't really want
14:30
Speaker 2: to be in the backstop game, and you know, I
14:32
Speaker 2: want depositors to bail in a bank. I don't want
14:35
Speaker 2: to be the government to bail in a bank. So
14:37
Speaker 2: they're backing away from this, But that just means there'll
14:40
Speaker 2: be other products for consumers to look at. And there's
14:43
Speaker 2: no free lunch in finance, so if people want to
14:46
Speaker 2: get the same return, they'll probably have to take on
14:49
Speaker 2: more risk. So that is where we're at. I mean,
14:53
Speaker 2: the whole bond market is bigger than the share market
14:55
Speaker 2: much more complex. There's all kinds of different ways to
14:58
Speaker 2: lend your money and get it back in good and
15:02
Speaker 2: in good times we're always interested in the return on
15:05
Speaker 2: the investment, and in bad times we're just simply worried
15:08
Speaker 2: about the return of the investment.
15:10
Speaker 1: So what about the investor who listening to the show,
15:12
Speaker 1: who says, Okay, you know, I'm looking I'm looking for
15:15
Speaker 1: alternatives at least I'm looking at for alternatives six ures
15:18
Speaker 1: in cash. I read about these private credit funds, or
15:21
Speaker 1: maybe someone said I went into them and I really
15:24
Speaker 1: didn't know what I was going into, and I'm worried.
15:26
Speaker 2: Now.
15:26
Speaker 1: Similarly, they see the hybrids are the habits are there,
15:29
Speaker 1: but the market is shrinking. Bonds have are sitting there
15:35
Speaker 1: as as an alternative on the on the on the
15:38
Speaker 1: fixed side or on the on the safer side, defensive side,
15:42
Speaker 1: and rates have sort of crawled up along to the
15:46
Speaker 1: point that our government bonds are now over four percent.
15:50
Speaker 1: So what's your view on bonds for the private investor now?
15:57
Speaker 2: Yeah, So just a reminder, what we're talking about all
15:59
Speaker 2: kinds of flightas of debt investments, and now debt's are
16:03
Speaker 2: four letter words. So we don't really use that in public,
16:05
Speaker 2: but that's all these are just and the debt market's
16:07
Speaker 2: bigger in equity markets. There's a whole ladder of risk
16:10
Speaker 2: and return and at the low lowest end we would
16:14
Speaker 2: believe would be government loans, and generally a loan for
16:19
Speaker 2: a few years is called a bond, and a loan
16:22
Speaker 2: for a lesson a year we might call a note.
16:24
Speaker 2: But anyway, they're all we would probably think the safest
16:28
Speaker 2: creditor in Australia is the Commonwealth government, so when you
16:31
Speaker 2: lend money to them, you can do that by buying,
16:34
Speaker 2: generally second hand, a bond that's been issued to help
16:38
Speaker 2: finance the spending a lot of spending, which there is
16:43
Speaker 2: a lot of demands just now, so you can lend,
16:46
Speaker 2: you can buy secondhand essentially refinance someone who lent money
16:50
Speaker 2: to the government, and in Australia we can do that
16:53
Speaker 2: on the ASX, so it is a kind of interesting
16:56
Speaker 2: swap from a sort of six percent yielding hybrid to
17:00
Speaker 2: a four point seven percent ten year government bond that
17:02
Speaker 2: you can buy in the AX and also own fee free.
17:06
Speaker 2: So these are everyone is probably much more aware of
17:10
Speaker 2: exchange traded funds. These are called exchange traded bonds, and
17:15
Speaker 2: probably they're called exchange traded government bonds, so we could
17:18
Speaker 2: call them ETBs or etgbs. But there's probably ten fifteen
17:23
Speaker 2: of these Commonwealth government issued bonds available to be bought
17:26
Speaker 2: on the AX. They come in two flavors. A nominal bond,
17:30
Speaker 2: which is the traditional type of bond where you're getting
17:33
Speaker 2: a certain interest or coupon, but there's also inflation link bonds,
17:37
Speaker 2: which you know, I quite like, although they have nuances.
17:40
Speaker 2: One of the strangest things is they made a lot
17:42
Speaker 2: of money as interest rates collapsed even though there was
17:45
Speaker 2: no inflation, and then when there was inflation, they lost money.
17:49
Speaker 2: So these government bonds are a little bit complicated because
17:52
Speaker 2: sometimes the government wants to issue bonds yielding only one
17:56
Speaker 2: percent and they sell those for ninety cents in the dollar.
17:59
Speaker 2: Sometimes the will issue a bond yielding six percent and
18:02
Speaker 2: they'll sell at a dollar ten person.
18:04
Speaker 1: The inflation bond is by no means a sort of
18:07
Speaker 1: god no.
18:07
Speaker 2: This is even though this is yeah, this is even
18:10
Speaker 2: traditional bonds. So the government, if a government offers a
18:13
Speaker 2: very low yielding bond, it won't get all its money.
18:16
Speaker 2: And if it offers a high bond, it'll get a premium.
18:19
Speaker 2: And so when you go on to the ASX or
18:22
Speaker 2: over the counter and buy a bond with a low coupon,
18:25
Speaker 2: you probably get it at a discount. And if you
18:27
Speaker 2: buy a bond with a high coupon, you know, imagine
18:30
Speaker 2: if you bought a seven percent Australian government bond, if
18:33
Speaker 2: there was one, you would probably have to pay one
18:35
Speaker 2: hundred and twenty dollars to get one hundred dollars back
18:37
Speaker 2: at maturity. So bond pricing and bond return is a
18:41
Speaker 2: confusing to the retail investor, for sure.
18:44
Speaker 1: It is specialist to a degree. But for the everyday
18:46
Speaker 1: investor who was started in bonds and have been looking
18:49
Speaker 1: at bonds through ETFs and if they were thinking of
18:52
Speaker 1: government bonds because they are marvelously sound, Okay, they're back
18:58
Speaker 1: by the government. You can't get a better backer, Which
19:01
Speaker 1: would you if if I'm sitting across the table from you,
19:04
Speaker 1: when I said I'd like exposures to these government bonds,
19:06
Speaker 1: I can go in through an ETF, or I can
19:07
Speaker 1: go and buy one.
19:09
Speaker 2: You can buy one. Yeah, you can buy one bond matures.
19:13
Speaker 1: And say, no matter what happens in the world, I'm
19:15
Speaker 1: going to get my four point seven percent. Which would
19:17
Speaker 1: you prefer?
19:19
Speaker 2: Well, I think some investors hate paying fees, so buy
19:23
Speaker 2: You could buy a basket of individual bonds and just
19:26
Speaker 2: own them to maturity. And if you bought them for
19:29
Speaker 2: eighty five dollars and they pay a low coupon, you'll
19:31
Speaker 2: get your hundred dollars on maturity. Or you buy them
19:34
Speaker 2: for one hundred and ten dollars with a very high
19:36
Speaker 2: coupon and you'll get one hundred dollars of maturity. They're fine.
19:40
Speaker 2: You can alternatively just buy a basket of bonds ready
19:43
Speaker 2: made from your favorite ETF supplier, but you will give
19:46
Speaker 2: them point one point two point three percent fee, which
19:50
Speaker 2: will reduce your bond coverage. And again those bonds are
19:54
Speaker 2: marked to market daily, and so strange things happen with bonds,
19:58
Speaker 2: good things and things. So the reason where why you
20:03
Speaker 2: are right by saying bonds are back is because thankfully
20:07
Speaker 2: yields are back up. And so if you were to
20:09
Speaker 2: buy a ten year Australian government bond today, you would
20:11
Speaker 2: get a yield of four point seven percent made up
20:15
Speaker 2: of easy it's pretty good, which is pretty good, yeah,
20:19
Speaker 2: and it will come from either some combination of capital
20:22
Speaker 2: gain or loss and yield. But generally speaking, your return
20:26
Speaker 2: if you hold it to maturity ten years from now
20:28
Speaker 2: be four point seven percent. And if the government runs
20:31
Speaker 2: out of money, it'll just invent it and print it
20:33
Speaker 2: and pay you off. So we don't know what the
20:35
Speaker 2: purchasing power will be good for it, but that's that's
20:38
Speaker 2: why they're good for it. But the second reason we
20:40
Speaker 2: like bonds and why they're back, is that they can
20:42
Speaker 2: now work as an air bag to your a share crash.
20:45
Speaker 2: So let's say the share market falls twenty percent next
20:48
Speaker 2: week because we somebody invades Iran or something else happens,
20:53
Speaker 2: and generally speaking, that money is going to rush out
20:56
Speaker 2: of the share market, probably into the safety of a
20:58
Speaker 2: government bond. And let's say the Central Bank says I've
21:01
Speaker 2: got your back, economy and cuts interest rates. So let's
21:04
Speaker 2: say a few months from now the Australian ten year
21:07
Speaker 2: yields three point seven. Well, James, if you owned a
21:10
Speaker 2: four point seven yielding ten year government bond and today
21:13
Speaker 2: new ones yield three point seven, someone's got to pay
21:17
Speaker 2: you a ten percent premium to take that off you
21:20
Speaker 2: because you're going to get one percent more than the
21:22
Speaker 2: current bond for ten years. So a holder of a
21:26
Speaker 2: four percent four point seven percent yielding government bond in
21:30
Speaker 2: a world a year later that's yielding only three point
21:33
Speaker 2: seven could sell that bond and make a return of
21:36
Speaker 2: fifteen percent. They'll make four point seven plus ten point
21:41
Speaker 2: capital games.
21:42
Speaker 1: So you get your four poincent, hold it for ten years,
21:45
Speaker 1: and if you so wish.
21:46
Speaker 2: You could sell it for a ten percent capital game.
21:49
Speaker 1: You could sell it assuming assuming there was a share
21:51
Speaker 1: market drop rather than a share market melitale.
21:54
Speaker 2: And that bond yields went down, and it didn't back
21:58
Speaker 2: in COVID because of the silly enough on yields were
22:00
Speaker 2: down at one percent and interest rates were zero, So
22:04
Speaker 2: the bond market was broken back in COVID, which is
22:07
Speaker 2: one of the reasons why I've fell in love with
22:09
Speaker 2: the yellow metal back then. But bonds are back, and
22:13
Speaker 2: they do work. They probably will work well now as
22:16
Speaker 2: a share market airbag.
22:18
Speaker 1: They're back. You're convinced, they're back in their traditional role,
22:23
Speaker 1: and we'll play their traditional role going forward.
22:27
Speaker 2: Convinced is a very expensive word. James switch issues. They're
22:31
Speaker 2: set up to succeed much more than when the governments
22:35
Speaker 2: of the world interfered with the bond market during zero
22:39
Speaker 2: interest rate policy and negative interest rate policy.
22:42
Speaker 1: It's a very good point, well worth hearing, folks. I
22:45
Speaker 1: think that is really what taking on board is really
22:47
Speaker 1: we're thinking about. I have been unconvinced about bonds as
22:51
Speaker 1: well for a long time, but I look this morning.
22:54
Speaker 1: I say, hey, look at that ten years four point
22:56
Speaker 1: seven percent government bond and guess what if the share
22:58
Speaker 1: market falls, It's only the price of it is only
23:00
Speaker 1: going to go up. I think it's a very compelling proposition.
23:05
Speaker 1: That's all. Let's leave it there. We're going to have
23:07
Speaker 1: a break. We've got some very good questions which I've
23:10
Speaker 1: curated for Doug. From Tim, from Scott, from Stephen back
23:14
Speaker 1: in a moment. Hello, Welcome back to the Australian's Money
23:23
Speaker 1: Puzzle podcast. James Kirby here with doctor Doug chu rec
23:27
Speaker 1: Family Office Director, Investment Committee Director, advisor to all and sundry,
23:33
Speaker 1: but particularly advisors in these days to the family office
23:38
Speaker 1: a circle. Okay, now he won't tell you who the
23:42
Speaker 1: family Office is, so I can't tell you, doctor, all right.
23:45
Speaker 1: The first question is from Tim Hi, James love the show.
23:48
Speaker 1: At risk of over simplifying things, No, No, don't need
23:52
Speaker 1: to worry about that, Tim. Won't AI increase productivity by
23:57
Speaker 1: default from most businesses, and if so, given the constant
24:01
Speaker 1: calls for enhanced productivity in Australia, isn't it simply a
24:05
Speaker 1: matter of time with broad AI adoption before productivity increases
24:10
Speaker 1: and subsequently living standards also increase, assuming once it has
24:13
Speaker 1: a job. Gee, Tim, that is a great question. And
24:16
Speaker 1: I don't argue with the core premise that AI will
24:19
Speaker 1: boost productivity, and I also don't argue with the premise
24:23
Speaker 1: that it could do so creating unemployment. However, unlike in
24:30
Speaker 1: the past, I think we may well have a We
24:32
Speaker 1: could have a we could have high employment boom, which
24:36
Speaker 1: is not for everybody, but I think we could have
24:38
Speaker 1: a high employment boom, high unemployment boom, possibly for the
24:42
Speaker 1: first time in history, which leads us to all sorts
24:44
Speaker 1: of issues about whether people should get a university basic
24:47
Speaker 1: income and all that thoughts. Doctor Doug, I'm sure this
24:50
Speaker 1: one got you thinking.
24:53
Speaker 2: I think it's a very well worded question, assuming one
24:56
Speaker 2: has a job. So reminder, productivity sounds like this interesting concept,
25:03
Speaker 2: but all it is work divided by number of people. Now,
25:06
Speaker 2: if you're a shareholder of a phone company and a bank,
25:09
Speaker 2: and there's less people answering working in the call center,
25:13
Speaker 2: then you're a beneficiary. But if you're the worker in
25:15
Speaker 2: the call center, then you're not. And by the way,
25:18
Speaker 2: my experiences with chatbots is I'm really very happy to
25:22
Speaker 2: get rid of them. They are definitely a case of
25:25
Speaker 2: in shitification. So it's definitely ready for AI to improve.
25:31
Speaker 1: But you know, you know, just this morning, Wise Take,
25:34
Speaker 1: one of Australia's biggest software companies just fired, fired more
25:38
Speaker 1: than three people overnight on AI. And I bet that
25:42
Speaker 1: that company will be rewarded on the share market for that.
25:46
Speaker 1: So what about Tim's basic premise. And by the way,
25:52
Speaker 1: some context, Australia has you know, the worst productivity possibly
25:56
Speaker 1: in the OECD. I mean, I've seen the tables. We're
25:58
Speaker 1: at the very bottom.
26:01
Speaker 2: Well, I don't think AI is going to fix you
26:03
Speaker 2: building approvals and all the hoops you have to go through.
26:06
Speaker 2: We just talked about all the regulation and financial advice,
26:09
Speaker 2: which is only going to get worse. I mean, I
26:11
Speaker 2: don't think there's an industry untouched by government wanting to
26:14
Speaker 2: add more complexity. So I feel a very strong we
26:18
Speaker 2: need a change of heart in this country, we need
26:21
Speaker 2: a kind of maybe we need to let things get
26:23
Speaker 2: so bad that we kind of have a kind of
26:25
Speaker 2: war revolution philosophy that says, no, we're going to get
26:29
Speaker 2: out of the way and let people make work and
26:32
Speaker 2: do business. But at the moment we keep throwing all
26:35
Speaker 2: kinds of mean well things, but we are suffocating the
26:39
Speaker 2: golden goose where it can't carry all the load and weight.
26:43
Speaker 2: So basically, yeah, there's a cost of society as a
26:47
Speaker 2: whole that if you want to do all these extra things,
26:50
Speaker 2: things move slowly and sludgely. And there are countries in
26:54
Speaker 2: the world that don't think this way. There's a very
26:56
Speaker 2: productive asia that would rather do the work that we do. So, James,
27:01
Speaker 2: I'm very worried about the overspending government.
27:04
Speaker 1: What about the promise of AI in productivity to basically
27:07
Speaker 1: create and lift in living standards that lift and profitability anyway,
27:12
Speaker 1: even with all the retake.
27:13
Speaker 2: Well, I worry that AI is overhyped, And I think
27:16
Speaker 2: all we're going to do is look back in history
27:18
Speaker 2: at all the different technological revolutions of which this is one.
27:21
Speaker 2: You know, when we created canals, we didn't have to
27:25
Speaker 2: cart stuff. When we created trains. We didn't have the
27:28
Speaker 2: canal stuff when we created the phone company, and we
27:32
Speaker 2: didn't have to telegraph stuff, you know, and we created
27:35
Speaker 2: the Internet. We did all kinds of things, and this
27:38
Speaker 2: is just another technological revolution which will enhance certain things.
27:42
Speaker 2: But I don't think BHP is going to be a
27:44
Speaker 2: huge beneficiary of this. Your favorite gold miner won't. But
27:48
Speaker 2: maybe government will get a bit more efficient, but I'd
27:51
Speaker 2: be surprised. And it's just something else that will I think,
27:55
Speaker 2: improve our living standards. But if you were a buggy
27:58
Speaker 2: whip manufacturer and the automobile came along and then it
28:01
Speaker 2: was impactful to your career. So and don't get me
28:05
Speaker 2: started about tech bros and technology and stable coins and.
28:12
Speaker 1: All right, let's go.
28:13
Speaker 2: I'm worriedsome not skeptical. I'm worried. Anyway, let's move on.
28:17
Speaker 1: Okay, show me to read out Scott's question, Tim, Yes,
28:21
Speaker 1: and by the way, information only, folks, as you know,
28:23
Speaker 1: not advice, okay, because this one is of that nature. Scott. Yes,
28:26
Speaker 1: what's Scott's question there?
28:28
Speaker 2: Doug. I wanted to share detail regarding the etf VTS
28:34
Speaker 2: because it's as US domiciled investors must complete a w
28:38
Speaker 2: A B E N form via the share registry in
28:41
Speaker 2: this case computer shares. In my experience, brokers like Compsect
28:44
Speaker 2: don't always notify investors of this, and I've missed years
28:47
Speaker 2: of dividend tax concessions for my children's education fund before
28:51
Speaker 2: discovering the requirement.
28:55
Speaker 1: Scott is Scott right, there can he not. You can't
28:57
Speaker 1: catch up or anything. You can't retrospectively do anything. And
29:02
Speaker 1: the WBN form, Folks, if you've been this thing, we've
29:04
Speaker 1: been talking about it, it's just this pain in the
29:06
Speaker 1: book form that you have to do if you buy
29:08
Speaker 1: overseas shares.
29:10
Speaker 2: Yeah, so if you're buying overseas shares or in this case,
29:12
Speaker 2: you're actually investing in an overseas fund. So this is
29:16
Speaker 2: an ETF from Vanguard VTS gives you a very low
29:19
Speaker 2: cost exposure to the US share market. There's a cousin
29:22
Speaker 2: fund called VEEU, which gives you very low cost exposure
29:26
Speaker 2: to everything but the US share market. These are US
29:28
Speaker 2: domiciled funds which were released in Australia very early on
29:32
Speaker 2: as a demonstration of how low you can go in
29:35
Speaker 2: ETF pricing. But the foreign domiciled cross listed in Australia
29:41
Speaker 2: ETFs aren't very popular, and one of the reasons being
29:44
Speaker 2: is because the foreign government in this case of the US,
29:47
Speaker 2: wants to tax you, and all of that work's done
29:49
Speaker 2: for you in an Australian domiciled fund. Now, when the
29:53
Speaker 2: government of the US wants to tax you, first of all,
29:55
Speaker 2: it will tax you at a very punitive rate, which
29:57
Speaker 2: might be thirty percent for and if you it's not
30:01
Speaker 2: a must, but if you file a W EIGHTB in form,
30:05
Speaker 2: then the US government will kindly read the tax treaty
30:08
Speaker 2: written thirty years ago between Australia and the US and
30:12
Speaker 2: drop the withholding tax to fifteen percent, cut that in half. Now,
30:17
Speaker 2: what should happen in many cases is when you file
30:20
Speaker 2: your tax return, you say to the Australian government, I've
30:23
Speaker 2: earned some dividend from this overseas investment, but the US
30:27
Speaker 2: government took thirty or fifteen percent or whatever is the
30:31
Speaker 2: dollar tax, and you'll get a credit for it according
30:34
Speaker 2: to our tax agreement with the US. Now where the problem.
30:39
Speaker 2: So in case of Scott this is for a children's
30:42
Speaker 2: education fund, so this would not be a tax free scheme,
30:45
Speaker 2: possibly unless it's a very low balanced fund and there
30:48
Speaker 2: are rules around children investing. But if the children were
30:51
Speaker 2: paying tax, then in theory, the higher or lower after
30:55
Speaker 2: filing a W EIGHTB and form tax taken by the
30:59
Speaker 2: US government would offset and reduce the tax payable to
31:03
Speaker 2: the Australian government. A problem for a lot of our
31:06
Speaker 2: listeners here is they may be tax free investors because
31:09
Speaker 2: they cleverly arrange their affairs using pensions super or they
31:13
Speaker 2: have lots of franking credits and they pay zero tax
31:16
Speaker 2: to the Australian government. So when you go to the
31:19
Speaker 2: Australian government, so I paid this tax overseas, may or
31:22
Speaker 2: may not be reduced by funding this pain in the
31:24
Speaker 2: butt form, They're not going to give you a credit.
31:27
Speaker 2: So these are not refundable tax credits. They're just offsetting
31:30
Speaker 2: tax credits. So a general rule is you'd probably want
31:33
Speaker 2: to steer away from these type of investments. Another observation
31:38
Speaker 2: is be careful when you invest offshore for income, because
31:42
Speaker 2: you can't escape that the foreign government wants to take
31:44
Speaker 2: some money. And this is a two way street. When
31:47
Speaker 2: a foreigner invests in Australia, we take some of their money.
31:51
Speaker 2: Now in both cases, no one seems to care about
31:54
Speaker 2: capital gains, which is a topical thing. But that's thank
31:58
Speaker 2: you to Scott for reminding there's a few of these
32:01
Speaker 2: funny ETFs out there, and not many that are not astrand,
32:05
Speaker 2: that are technically not fully astrained domiciled. They don't do
32:08
Speaker 2: the tax work for you, and you do. If you
32:11
Speaker 2: want to reduce the tax the US takes from you
32:13
Speaker 2: and not try to get it back through your tax
32:16
Speaker 2: filing process, you should file a w e BN form.
32:19
Speaker 1: Okay, So, folks, here's the short Thank you, Doug. That
32:24
Speaker 1: is a splendid answer, and that's the sort of answer
32:26
Speaker 1: to get around the table of family offices, right because
32:29
Speaker 1: the amounts, not the amounts the question are enormous as
32:33
Speaker 1: opposed to perhaps the amounts in Scott's fund are my
32:36
Speaker 1: funder anyone else is fun But really I would think
32:38
Speaker 1: the short answer is never go near a fund that
32:42
Speaker 1: is a funder company that's domosigned in the US unless
32:46
Speaker 1: you must. So you know, if you want to buy
32:48
Speaker 1: that particular American company, then you must do it and
32:50
Speaker 1: find the wbe N form to make sure you don't
32:53
Speaker 1: lose any dividend income. However, for most ETFs, especially most tts,
32:58
Speaker 1: most of the time, especially all the new were ones.
33:01
Speaker 1: They're very clever. They got they got amasidant here the
33:03
Speaker 1: side stepped all that. So I would imagine if Scott
33:06
Speaker 1: could rewind the clock, he would not have gone and
33:09
Speaker 1: bought us amicie yt if well, it's a cheap.
33:13
Speaker 2: It's very cheap. It's I think it was I membory.
33:14
Speaker 2: It was six basis points when at the time other
33:17
Speaker 2: things were twenty thirty. So Scott would have saved anybody
33:20
Speaker 2: he was getting. The dividends on US shares is terrible.
33:24
Speaker 2: It's only one percent maybe, and then if so, he's
33:28
Speaker 2: losing point three point one five percent in dividend tax.
33:32
Speaker 2: There By the way, this James, if there's any US listeners,
33:37
Speaker 2: this is very complicated and we can't give you US
33:39
Speaker 2: tax advice, but funny enough for you. The US government
33:42
Speaker 2: hates try and manage funds invested by its own dual citizens,
33:48
Speaker 2: so VTS and BEU might be a good product for
33:51
Speaker 2: your US tax listeners.
33:54
Speaker 1: There you go to US tax listeners. Take that on board.
33:57
Speaker 1: All right? Very good? Hey, thank you very much, Delta.
34:00
Speaker 1: Great to have you on the show again. It's been
34:01
Speaker 1: too long. We'll have you on again soon.
34:03
Speaker 2: Thank you.
34:04
Speaker 1: You're welcome and also, folks, just something would be terrific
34:09
Speaker 1: if you could add some We get so many correspondents
34:13
Speaker 1: saying they love the show, you know, but if you
34:15
Speaker 1: want to support the show, would be terrific to have
34:17
Speaker 1: some reviews on the Apple iPod reviews. We haven't had
34:21
Speaker 1: one for Ois. I would love to see some new ones. Okay.
34:24
Speaker 1: Today's show was produced by li Is Sam mcglue. I'm
34:27
Speaker 1: James Kirby. Keep the correspondence Rolling the money puzzle at
34:31
Speaker 1: the Australian dot com dot Au. Talk to you soon.